[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]


                    TROLLING FOR A SOLUTION: ENDING ABUSIVE 
                              PATENT DEMAND LETTERS

=======================================================================

                                HEARING

                               BEFORE THE

           SUBCOMMITTEE ON COMMERCE, MANUFACTURING, AND TRADE

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 8, 2014

                               __________

                           Serial No. 113-138
                           
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                           


      Printed for the use of the Committee on Energy and Commerce

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                    COMMITTEE ON ENERGY AND COMMERCE

                          FRED UPTON, Michigan
                                 Chairman
RALPH M. HALL, Texas                 HENRY A. WAXMAN, California
JOE BARTON, Texas                      Ranking Member
  Chairman Emeritus                  JOHN D. DINGELL, Michigan
ED WHITFIELD, Kentucky                 Chairman Emeritus
JOHN SHIMKUS, Illinois               FRANK PALLONE, Jr., New Jersey
JOSEPH R. PITTS, Pennsylvania        BOBBY L. RUSH, Illinois
GREG WALDEN, Oregon                  ANNA G. ESHOO, California
LEE TERRY, Nebraska                  ELIOT L. ENGEL, New York
MIKE ROGERS, Michigan                GENE GREEN, Texas
TIM MURPHY, Pennsylvania             DIANA DeGETTE, Colorado
MICHAEL C. BURGESS, Texas            LOIS CAPPS, California
MARSHA BLACKBURN, Tennessee          MICHAEL F. DOYLE, Pennsylvania
  Vice Chairman                      JANICE D. SCHAKOWSKY, Illinois
PHIL GINGREY, Georgia                JIM MATHESON, Utah
STEVE SCALISE, Louisiana             G.K. BUTTERFIELD, North Carolina
ROBERT E. LATTA, Ohio                JOHN BARROW, Georgia
CATHY McMORRIS RODGERS, Washington   DORIS O. MATSUI, California
GREGG HARPER, Mississippi            DONNA M. CHRISTENSEN, Virgin 
LEONARD LANCE, New Jersey                Islands
BILL CASSIDY, Louisiana              KATHY CASTOR, Florida
BRETT GUTHRIE, Kentucky              JOHN P. SARBANES, Maryland
PETE OLSON, Texas                    JERRY McNERNEY, California
DAVID B. McKINLEY, West Virginia     BRUCE L. BRALEY, Iowa
CORY GARDNER, Colorado               PETER WELCH, Vermont
MIKE POMPEO, Kansas                  BEN RAY LUJAN, New Mexico
ADAM KINZINGER, Illinois             PAUL TONKO, New York
H. MORGAN GRIFFITH, Virginia         JOHN A. YARMUTH, Kentucky7
GUS M. BILIRAKIS, Florida
BILL JOHNSON, Missouri
BILLY LONG, Missouri
RENEE L. ELLMERS, North Carolina

           Subcommittee on Commerce, Manufacturing, and Trade

                          LEE TERRY, Nebraska
                                 Chairman
                                     JANICE D. SCHAKOWSKY, Illinois
LEONARD LANCE, New Jersey              Ranking Member
  Vice Chairman                      JOHN P. SARBANES, Maryland
MARSHA BLACKBURN, Tennessee          JERRY McNERNEY, California
GREGG HARPER, Mississippi            PETER WELCH, Vermont
BRETT GUTHRIE, Kentucky              JOHN A. YARMUTH, Kentucky
PETE OLSON, Texas                    JOHN D. DINGELL, Michigan
DAVE B. McKINLEY, West Virginia      BOBBY L. RUSH, Illinois
MIKE POMPEO, Kansas                  JIM MATHESON, Utah
ADAM KINZINGER, Illinois             JOHN BARROW, Georgia
GUS M. BILIRAKIS, Florida            DONNA M. CHRISTENSEN, Virgin 
BILL JOHNSON, Missouri                   Islands
BILLY LONG, Missouri                 HENRY A. WAXMAN, California, ex 
JOE BARTON, Texas                        officio
FRED UPTON, Michigan, ex officio
  
                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Lee Terry, a Representative in Congress from the State of 
  Nebraska, opening statement....................................     1
    Prepared statement...........................................     2
Hon. Janice D. Schakowsky, a Representative in Congress from the 
  State of Illinois, opening statement...........................
Hon. Jerry McNerney, a Representative in Congress from the State 
  of California, opening statement...............................     5

                               Witnesses

William Sorrell, Attorney General, State of Vermont..............     6
    Prepared statement...........................................     9
    Answers to submitted questions...............................   103
Rheo Brouillard, President and CEO, Savings Institute Bank and 
  Trust Company, on Behalf of American Bankers Association.......    27
    Prepared statement...........................................    29
    Answers to submitted questions...............................   111
Dennis Skarvan, Deputy General Counsel, Intellectual Property 
  Group, on Behalf of Coalition for 21st Century Patent Reform...    35
    Prepared statement...........................................    37
    Answers to submitted questions...............................   114
Jason Schultz, Associate Professor of Clinical Law, New York 
  University School of Law.......................................    48
    Prepared statement...........................................    50
    Answers to submitted questions...............................   130
Mark Chandler, Senior Vice President and Chief Compliance 
  Officer, Cisco Systems Incorporated............................    54
    Prepared statement...........................................    56
    Answers to submitted questions...............................   137
Michael Dixon, Ph.D., President and CEO, UNeMed Corporation......    69
    Prepared statement...........................................    71
    Answers to submitted questions...............................   142

                           Submitted material

Material submitted by Mr. Terry..................................    92

 
     TROLLING FOR A SOLUTION: ENDING ABUSIVE PATENT DEMAND LETTERS

                              ----------                              


                             APRIL 8, 2014

                  House of Representatives,
Subcommittee on Commerce, Manufacturing, and Trade,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:05 a.m., in 
room 2123 of the Rayburn House Office Building, Hon. Lee Terry 
(chairman of the subcommittee) presiding.
    Members present: Representatives Terry, Lance, Olson, 
McKinley, Kinzinger, Bilirakis, Johnson, Long, Schakowsky, 
McNerney, Welch, Rush, Matheson, and Barrow.
    Staff present: Charlotte Baker, Deputy Communications 
Director; Kirby Howard, Legislative Clerk; Brian McCullough, 
Senior Professional Staff Member, CMT; Paul Nagle, Chief 
Counsel, CMT; Shannon Weinberg Taylor, Counsel, CMT; Graham 
Dufault, CMT; Michelle Ash, Democratic Chief Counsel; and Will 
Wallace, Democratic Professional Staff Member.
    Mr. Terry. We are going to go ahead and start, and I want 
to thank our witnesses. This is Paul's first time in the chair 
replacing Gib Mullen, so, Paul, thank you for your good work. I 
just want to let people know, or the witnesses, I appreciate 
you coming here today, and one of them, extraordinary 
circumstances, Mr. Brouillard, who actually could have attended 
the NCAA final game last night, and is a UConn fan, and from 
Connecticut. So that is a bigger sacrifice than we usually 
encounter here.
    Mr. Brouillard. I gave my tickets up to be here, Mr. 
Chairman.
    Mr. Terry. Yes. Now some of us are doubting your ability to 
make good decisions. But we are thankful that you did that. And 
I will introduce all of you before we actually start your 
testimony, and so now I am going to start my opening statement.

   OPENING STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF NEBRASKA

    Mr. Terry. Good morning, and welcome, everyone, to today's 
hearing, called, ``Trolling for a Solution, Ending Abusive 
Patent Demand Letters''. As Thomas Edison once said, to invent 
you need a good imagination and a pile of junk. That may be 
true, but I would also add that you also need to fight for your 
invention because, as Thomas Moore said, it is naturally given 
to all men to esteem their own inventions best.
    Now, in competition of ideas, whether we are talking about 
a multinational company that spends $8 million per day on R and 
D, or an inventor with a workshop in his basement, the 
Constitution treats intellectual property equally. So let me 
start by saying that we must respect the arrangement small 
inventors need in order to enforce their patent rights. And 
while we are at it, let us emphasize that not all patent 
assertion entities are trolls. The role of patent assertion 
entities is very important for small inventors who lack the 
resources to enforce his or her own property rights. Taking 
away or degradating the flexibility to assign enforcement 
rights would do nothing less than encroach on an inventor's 
constitutional right to exclude others from infringing their 
property rights.
    With that said, what we address today are instances where 
bad actors extort money from innocent parties under the 
pretense of asserting intellectual property rights. This kind 
of activity belongs in the same family as other type of unfair 
and deceptive trade practices. Our job is to separate it from 
legitimate right assertions. In order to do so, we have here 
today a diverse panel of witnesses whose testimony gives us a 
variety of perspectives on the issue.
    Already we are seeing a set of potentially conflicting 
considerations. First, patent enforcement differs across 
industries. According to UNeMed testimony, it considers listing 
patent claims and demand letters to be standard procedure. 
Caterpillar, on the other hand, would find it difficult in some 
situations to list the exact claim at issue because it often 
lacks access to the potentially infringing product.
    Second, some argue that we should only address letters sent 
to end-users of patents. Now, this may fail to address 
situations like the one in UNeMed's testimony, where a small 
inventor was slapped with an abusive demand letter just after 
clearing an FDA approval process. Even so, the majority of 
complaints on this issue appear to come from the end-users who 
are not versed in patent law.
    I will not exhaust the issues before us today, but I want 
to clarify one thing. Some may say that legislative action to 
curb abusive demand letters would devalue intellectual property 
rights generally. I disagree. In fact, it remains that these 
bad actors are arrogantly manipulating the intellectual 
property system and getting away with it. Several state 
Attorney Generals, including John Bruning of Nebraska, have 
brought suits under their consumer protection statutes tools, 
and thus have far proven difficult to use. As a result, many 
states are working rapidly to update their laws.
    There is something to be done here, and in order to get it 
right we will need the assistance of all of the stakeholders 
and witnesses here before us today, and I thank the witnesses 
for being here.
    [The prepared statement of Mr. Terry follows:]

                  Prepared statement of Hon. Lee Terry

    Good morning, and welcome to our hearing today titled 
Trolling for a Solution: Ending Abusive Patent Demand Letters.
    As Thomas Edison once said, ``To invent, you need a good 
imagination and a pile of junk.''
    That may be true, but I would add that you also need to 
fight for your invention-because, as Thomas More said, ``It is 
naturally given to all men to esteem their own inventions 
best.''
    Now, in the competition of ideas-whether we are talking 
about a multinational company that spends $8 million per day on 
R&D or an inventor with a workshop in the basement-the 
Constitution treats intellectual property the same.
    So let me start by saying that we must respect the 
arrangements small inventors need to make in order to enforce 
their patent rights. While we're at it, let me emphasize that 
not all ``patent assertion entities'' are ``trolls.''
    The role of the Patent Assertion Entity (PAE) is very 
important for a small inventor who lacks the resources to 
enforce his or her own property rights. Taking away or 
degrading the flexibility to assign enforcement rights would do 
nothing less than encroach on inventors' constitutional right 
to exclude others from infringing their property rights.
    With that said, what we address today are instances where 
bad actors extort money from innocent parties under the 
pretense of asserting intellectual property rights. This kind 
of activity belongs in the same family as other types of unfair 
and deceptive trade practices-our job is to separate it from 
legitimate rights assertion.
    In order to do so, we have here today a diverse panel of 
witnesses whose testimony gives us a variety of perspectives on 
the issue. Already, we are seeing a set of potentially 
conflicting considerations. First, patent enforcement differs 
across industries. According to UNeMed's testimony, it 
considers listing patent claims in demand letters to be 
standard procedure. Caterpillar, on the other hand, would find 
it difficult in some situations to list the exact claim at 
issue because it often lacks access to the potentially 
infringing product.
    Second, some argue that we should only address letters sent 
to end users of patents. This may fail to address situations 
like the one in UNeMed's testimony, where a small inventor was 
slapped with an abusive demand letter just after clearing an 
FDA approval process. Even so, the majority of complaints on 
this issue appear to come from end users who are not versed in 
patent law.
    I will not exhaust the issues before us today, but I want 
to clarify one thing. Some may say that legislative action to 
curb abusive demand letters would devalue intellectual property 
rights generally. I disagree. The fact remains that these bad 
actors are arrogantly manipulating the intellectual property 
system-and they're getting away with it.
    Several state attorneys general have brought suits under 
their consumer protection statutes, tools that have thus far 
proven difficult to use-and as a result, many states are 
working rapidly to update their laws.
    There is something to be done here and in order to get it 
right we'll need the assistance of all stakeholders.
    I thank the witnesses for being here today and providing 
their valuable insights.

    Mr. Terry. Have one minute. Does anybody want it? Hearing 
none, I yield back my time, and recognize the Ranking Member of 
our subcommittee, Ms. Schakowsky.

       OPENING STATEMENT OF HON. JANICE D. SCHAKOWSKY, A 
     REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS

    Ms. Schakowsky. Thank you, Mr. Chairman, for holding this 
important hearing on patent assertion entities, also known as 
patent trolls. And like you, I want to develop a solution to 
this growing issue, and look forward to doing so in a 
bipartisan manner.
    Trolls assert that the patents they hold have been 
infringed upon, sending vague and threatening letters to 
hundreds, or even thousands of end-users of products, typically 
small businesses or entrepreneurs. Those businesses are told 
that they can pay the patent troll to continue using the 
technology. Considering the cost and resources needed to vet 
and fight a patent infringement claim, may small businesses 
choose to settle the claim by paying the troll. Others 
investigate and fight the claims, draining precious resources, 
and stunting the growth of their businesses.
    It costs patent trolls virtually nothing to send patent 
demand letters, but it can be incredibly lucrative, and 
business is booming. In 2011 patent troll costs U.S. businesses 
an estimated $29 billion, and the number of defendants in 
patent infringement lawsuits increased about 130 percent from 
2007 to 2011, according to the Government Accountability 
Office. At best, patent trolls are misleading. At worst, they 
are extortionists. This is fundamentally a fairness issue. As 
the subcommittee charged with protecting consumers and 
promising fair business practices, we must take action to 
reduce frivolous patent claims.
    I am glad that the FTC, the Federal Trade Commission, is 
using its existing authority to better understand the nature of 
patent assertion entities, and the demand letters that they 
issue. I look forward to the commission's analysis, which I 
believe will be instructive as we decide how to curb trolling.
    Nonetheless, while we wait for the FTC review, there are 
steps that we can, and should, take now to combat patent 
trolls. I believe there should be more transparency and minimum 
standards established for patent demand letters. There are many 
ideas about how to increase transparency, including proposals 
to require the public disclosure of egregious patent demand 
letters. There are also suggestions as to the minimum 
information that should be included in a patent demand letter, 
including the patent allegedly infringed, and the technology 
used that allegedly infringes on the patent.
    However, it is vitally important that we approach this 
issue with the recognition that many patent infringement claims 
are reasonable efforts to protect intellectual property. We 
also need to be careful to make sure that universities, 
research institutions, and others that develop and hold 
patents, but may not develop products for sale, are not labeled 
as trolls. In fighting trolls, we shouldn't undermine the 
ability of innovators to develop and defend their patents.
    While our witnesses today come at this issue from a wide 
variety of perspectives, it was interesting to read in their 
prepared testimony that each believes that this is an issue in 
need of attention. The details of whatever legislation this 
committee puts forth will be incredibly important, but the fact 
that our witnesses unanimously agree that we have a problem is 
an important start. I look forward to hearing their perspective 
about how legislation should be structured to make sure that 
patent demand letters are more fair and transparent moving 
forward.
    Again, thank you for holding this hearing today, Mr. 
Chairman. I yield the remainder of my time to Mr. Welch.
    Mr. Welch. Thank you very much. I am getting the 
opportunity to introduce our Attorney General in Vermont, and 
we are very proud of Bill Sorrell for the leadership that you 
have provided, and also the other panelists too. This is an 
incredible issue, and Bill Sorrell was very responsive to a lot 
of the folks, that range from businesses that got these 
unbelievable stick-up letters, to non-profits, where these 
parents had raised money in the community to set up a group 
home for disabled kids, and next thing you know, their 
threadbare budget is being threatened by these letters, 
demanding payment for--they couldn't figure it out.
    And, Bill, you worked with Jerry Tarrant and others with 
our legal community there. It was very responsive, and you are 
working with your fellow Attorney Generals. Mr. Chair, our 
Attorney General was the former head of the Attorney Generals. 
He has received numerous awards. I am not going to bore 
everybody with what they are, but I will tell you they are 
good, and a lot of us wish we had them as well. Leader in 
tobacco legislation, Humane Society issues, champion for kids, 
taking the fight about prescription drug medication abuse, and 
abuse of drugs in our state. So it is great to have Bill 
Sorrell here, and it is great to have you on the patent troll 
issue, and we look forward to working together to try to deal 
with this. Thank you. I yield back. Thank you, Ranking Member 
Schakowsky.
    Ms. Schakowsky. And I yield back.
    Mr. Terry. All right. Does anyone on the Republican side 
want time? I have to talk slow to draw this out. Anybody want 
to talk about the game? All right. Seeing none, no one taking 
our time, then, Mr. McNerney, you are our resident patent 
holder. Would you like the minority's time?
    Mr. McNerney. I sure would.
    Mr. Terry. But you are the only one. You are the expert.
    Mr. McNerney. I thank you, Mr. Chairman.
    Mr. Terry. You are recognized for 5 minutes.

 OPENING STATEMENT OF HON. JERRY MCNERNEY, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. McNerney. I appreciate your calling this hearing. You 
know, if you hang around here for long enough, you see the 
advertisements in the Hill rags about patent trolls taking more 
and more money over time, and those will get your attention. If 
you take the Metro, you see, every so often at the Metro stops, 
big advertisements, so this is clearly an issue. The fact that 
the so-called patent trolls are demanding stick-up letters, as 
my friend from Vermont said, it is an issue. We need to address 
it. There is a general understanding that this is a problem, 
and I am glad to see this come up in a hearing so that we can 
hear your inputs, how we can move forward together, how we can 
best address this issue.
    As the Chairman said, I have patents. One of them is a Fat 
Wire patent, and the other a software patent, so I kind of 
understand where we could be with this issue. I understand, as 
a small patent holder, how difficult it would be to assert your 
rights against a large corporation, if that comes to that.
    So there is a place for patent assertion entities. I want 
to see that preserved, but we want to see that the sort of 
stick-up nature of this is curtailed, so it is a balance. It is 
important to have a well thought out and meaningful bipartisan 
discussion, and I think, on this particular issue, we have a 
good desire to work on a bipartisan basis.
    So we have an opportunity to make it better, and I am 
hoping to be a part of that. I am hoping that your testimony 
can help guide us on the decisions that we need to make. So, 
with that, I am going to yield back, Mr. Chairman.
    Mr. Terry. Anyone else? All right. So Mr. Schultz----
    Ms. Schakowsky. Would either of the other members of the 
committee--no? OK. Mr. Matheson or Mr. Barrow? No? OK. Thank 
you.
    Mr. Terry. Gentlelady yields back, and so I want to 
introduce our panel now. Bill Sorrell is one of our resident 
expert witnesses from the AG's office, and we appreciate you 
being here today. For those of you who haven't testified before 
us, we go stage left to right, so, Mr. Sorrell, as Attorney 
General of Vermont, will go first.
    Then we now have Mr. Bouillard, the person who gave up his 
tickets last night to be here, and your sacrifice is massive, 
and well appreciated. You represent the Savings Institute Bank 
and Trust Company on behalf of the American Bankers 
Association. Then, next to him, Mr. Skarvan is Deputy General 
Counsel, Intellectual Property for Caterpillar. Appreciate your 
appearance.
    Then Mr. Schultz, or as we call him, Jason ``Just In Time'' 
Schultz, Associate Professor of Clinical Law, New York 
University School of Law, and we understand it has been a 
difficult morning for you, and we appreciate that you undertook 
these heroic efforts to get here today. Thank you.
    Then we have Mr. Mark Chandler, Senior Vice President and 
Chief Compliance Officer of Cisco Systems, who has great 
experience with these type of demand letters.
    Then, last, Mr. Michael Dixon, Ph.D. Dr. Dixon is President 
and CEO of UNeMed Corporation, University of Nebraska's holding 
business of all of the patents generated by the University.
    So, at this time, Mr. Sorrell, you are recognized for your 
5 minutes.

STATEMENTS OF THE HONORABLE WILLIAM SORRELL, ATTORNEY GENERAL, 
 STATE OF VERMONT; RHEO BROUILLARD, PRESIDENT AND CEO, SAVINGS 
INSTITUTE BANK AND TRUST COMPANY, ON BEHALF OF AMERICAN BANKERS 
     ASSOCIATION; DENNIS SKARVAN, DEPUTY GENERAL COUNSEL, 
 INTELLECTUAL PROPERTY GROUP, ON BEHALF OF COALITION FOR 21ST 
 CENTURY PATENT REFORM; JASON SCHULTZ, ASSOCIATE PROFESSOR OF 
CLINICAL LAW, NEW YORK UNIVERSITY SCHOOL OF LAW; MARK CHANDLER, 
   SENIOR VICE PRESIDENT AND CHIEF COMPLIANCE OFFICER, CISCO 
 SYSTEMS INCORPORATED; AND MICHAEL DIXON, PH.D., PRESIDENT AND 
                    CEO, UNEMED CORPORATION

                  STATEMENT OF WILLIAM SORRELL

    Mr. Sorrell. Thank you, Mr. Chairman, Ranking Member 
Schakowsky, members of the subcommittee. Thank you much for the 
opportunity to appear today and speak about an issue that is of 
great importance to the Nation's Attorneys General, as 
evidenced by the fact that 42 offices signed on to a sign-on 
letter that we sent to the Senate drafted by General Buling and 
myself in February on these issues. Much of the work in the 
House and in the Senate on assertions of patent infringement 
have related to abusive litigation tactics, but the truth of 
the matter is that is just the tip of the iceberg, and I want 
to talk some today about the iceberg, the roughly as much as 99 
percent of cases that don't result in the filing of a civil 
complaint.
    And so I want to talk about, for example, Lincoln Street, 
Inc., a small nonprofit in Springfield, Vermont with 16 direct 
care workers, 12 or 13 administration and support staff, that 
provide home care to developmentally disabled Vermonters. In 
the fall of 2012, Lincoln Street received a letter from one of 
the roughly 40 shell subsidiary corporations of a parent 
corporation by the name of MPHJ Technology Investments, LLC. 
Paraphrasing, the letter says, we own patents X and Y, we 
believe you are in violation of them, and that you are scanning 
documents and sending those in e-mail through a computer 
network. Please be in touch with us within 2 weeks and prove to 
us that you are not infringing our patent, or talk to us about 
resolving this, and paying licensing fees to us. We have had a 
very positive response around the country from the business 
community, many companies agreeing to pay us $1,000 per 
employee.
    A couple weeks later, a second letter comes, this time from 
a Texas law firm by the name of Farney Daniels says, we have 
been retained because you didn't respond to the first letter. 
This is serious. We hope that we don't have to get to 
litigation, but unless you are in touch with us forthwith and 
resolve this amicably, it is going to be trouble, please take 
this serious. And then there is the third letter a couple weeks 
later, also from Farney Daniels. This one attaches a draft, 
Federal Court Complaint, against the recipient of the letter, 
and says that, if you don't resolve this with us within 2 
weeks, we will,``be forced to file a complaint against you.'' 
If you are not in touch with us in 2 weeks, ``litigation will 
ensue otherwise.''
    Well, it wasn't just Lincoln Street that received that 
letter in the fall of 2012. We ultimately learned that 75 small 
businesses and nonprofits in the state received letters from 
one or other of the shell subsidiaries. And when we filed the 
first of its kind in the nation lawsuit in the spring of 2013 
against MPHJ, as of that time, not one lawsuit had been filed 
in Vermont, nor had, to our knowledge, a lawsuit been filed by 
MPHJ, or any of its shell subsidiaries, anywhere in the 
country. The Federal Trade Commission, in a draft complaint 
against MPHJ, has looked outside Vermont, and in its draft 
complaint says that one of the 80 or more shell subsidiaries of 
MPHJ sent demand letters to 16,450 small businesses and 
nonprofits in all 50 states in this country.
    So that is part of the iceberg. Rest of the iceberg, or 
other parts of the iceberg, are demand letters to smaller 
financial institutions saying, your ATMs use the web, they are 
in violation of our patent. Others go to local coffee houses 
that have free Wi-Fi, we have patents, you are in violation of 
those, please pay up.
    We filed our lawsuit in State Court. We were immediately 
removed to Federal Court, and MPHJ has said, one, we are 
totally pre-empted, because this is a patent matter. You can't 
be enforcing your State Consumer Protection Acts against us. 
And, second of all, you lack personal jurisdiction over us 
because all we have simply done is asserted patent 
infringement, and that doesn't subject us to personal 
jurisdiction.
    We also enacted in Vermont a statute on bad faith 
assertions of patent infringement at the request of various 
well known Vermont companies, and Utah, Virginia, Wisconsin, 
and Oregon have followed suit and adopted their own statutes. 
There are many others considering it. We hope that the Congress 
will take action, have more transparency in this arena, and 
evidence at the time of the assertion of patent infringement of 
any other proceedings or court matters that have ruled upon the 
patents in question. We want express statements that the states 
are not pre-empted, and that we have personal jurisdiction for 
those that blanket our states with these assertions of patent 
infringement.
    I have got 21 seconds left, but--sorry, I read it wrong. 
Thank you very much.
    [The prepared statement of Mr. Sorrell follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 
           
    Mr. Terry. Thank you, Bill.
    Mr. Brouillard, you are now recognized for your 5 minutes.

                  STATEMENT OF RHEO BROUILLARD

    Mr. Brouillard. Thank you, Mr. Chairman, and Ranking Member 
Schakowsky. Thank you again for giving us the chance to come 
and present our information to you today. My bank is a $1.3 
billion community bank that has been established since 1842. We 
serve Connecticut, and parts of Rhode Island.
    Obviously, the U.S. has a robust patent system which 
protects the rights of legitimate patent holders, and we 
believe those rights should continue to be protected. Patent 
trolls, however, as we have heard, abuse this system, and are 
serious threats to small businesses, banks, and credit unions 
throughout the country.
    For the cost of postage, a little stationary, and some 
time, these trolls use unscrupulous tactics to extort licensing 
fees from companies too small to pay the cost to defend 
themselves. The claims are often intentionally vague, and based 
on shaky legal standing. However, when confronted with threats 
of expensive litigation, many banks, especially smaller ones, 
find that their only option is to settle, rather than paying 
the millions of dollars it may cost to defend against extortive 
claims of patent infringement.
    I have seen this firsthand at my bank. In January 2013 a 
patent troll targeted my bank with a very vague letter, one 
page, claiming that they had conducted an investigation, and 
that our ATMs operated in a way that infringed upon their 
patents. Their letter included an exhibit which listed 13 
patent numbers, purported to be patent numbers. So we had a 
list of 13 seven digit numbers. That was the extent of the 
information provided. They demanded a sublicensing agreement, 
and, as Attorney General Sorrell indicated, we had 2 weeks to 
comply. Thirty other banks in Connecticut received that same 
vague notice, one of which included a bank that did not even 
have any ATMs, so there was obviously no investigation ever 
conducted.
    The pattern of these trolls is to send demand letters, 
threaten, or even file, lawsuits, and require a response within 
a short period of time. By forcing these settlements, they use 
these actions to intimidate their other targets. In fact, 2 
years before we received our demand letter, this same troll 
brought suits in other New England states, and, because of fear 
and lack of resources, over 100 banks quickly settled. The 
following year, 80 letters were sent to Maine and Massachusetts 
banks. They too ultimately settled.
    All of these letters were mailed, in fact, after a Federal 
Circuit Court upheld a lower court ruling invalidating the 
primary patent. Many of these banks ended up settling and 
paying their so-called sublicensing fee, as opposed to 
contesting the issue, because of the cost. In some respect, in 
Connecticut, we were lucky. We had learned about the troll 
having done its work earlier in the other New England states, 
and we also had the advantage of hearing about some of the 
rulings that were coming out of the courts against this 
particular troll.
    For my bank, the cost would have been $27,000, which at the 
time represented about 10 percent of monthly earnings for the 
bank. For the 30 Connecticut banks targeted, had we paid 
together, the amount would have been in excess of $300,000. 
Even though the courts have invalidated the patents, this has 
not stopped this particular troll from sending demand letters, 
and bringing legal action against other banks in other states. 
I am aware that there have been additional suits filed even 
this year in New York and New Jersey. We thank Congress for 
seriously addressing this issue, and commend the House for 
passing H.R. 3309, the Innovation Act, which begins to address 
the issue, but we feel this is just the first step, and more 
can be done.
    Chief among these is to require transparency in all 
allegations of a patent infringement, including details about 
the patent, how the target firm is infringing on it, who the 
real owner of the patent is, and whether the patent has 
expired, or been invalidated. This would help put an end to 
some of the abuses, while protecting legitimate patent holders. 
Other requirements we recommend include a registry of demand 
letters, and requiring bad actors to reimburse the small 
businesses for all fees and costs, including the costs to 
defend themselves.
    Vendors who supply technology and equipment should be made 
to defend their products against patent infringement claims. 
Many contracts today specifically exclude such a role, and 
small businesses are often not in a position to force changes 
in that language.
    In summary, the problem with patent trolls is widespread 
and getting worse, while the number of demand letters rises 
sharply each year. Fighting these trolls has a real cost, and 
we certainly urge Congress to take action to stop patent 
trolls, and protect small businesses from the enormous cost of 
abusive lawsuits. Thank you.
    [The prepared statement of Mr. Brouillard follows:]
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    Mr. Terry. Thank you.
    Mr. Skarvan, you are now recognized for your 5 minutes.

                  STATEMENT OF DENNIS SKARVAN

    Mr. Skarvan. Thank you, Mr. Chairman, Ranking Member 
Schakowsky, and members of the subcommittee. I am testifying 
today on behalf of the Coalition for 21st Century Patent 
Reform, or 21C, a broad and diverse group of nearly 50 
corporations, including 3M, Caterpillar, Eli Lilly, General 
Electric, Proctor and Gamble, and Johnson and Johnson. For more 
than 100 years, our coalition's companies have played a 
critical role in fostering innovation. We invest billions of 
dollars annually on research and development to create American 
jobs and improve lives. Caterpillar alone has more than 14,000 
patents worldwide, either awarded, or in the approval process. 
Caterpillar is a company of innovation. We spend $8 million a 
day on R and D.
    Let me say at the outset that we believe bad faith demand 
letters are a problem, and we support crafting a balanced 
solution. Notification of patent rights are routinely presented 
in business to business communications to provide early notice 
of a patent that otherwise may not be known to the recipient. 
Patent demand communications can also start the clock running 
on patent damages. Recipients take these letters seriously in 
the design and development of new products and technology, 
oftentimes designing around the patent to avoid knowingly 
infringing another party's rights.
    In many instances, the primary goal of the sender is simply 
to prevent copying, and ensure product differentiation within 
an industry. This is best accomplished by providing early 
notice, before monies are committed to substantial design and 
manufacturing investment, so that design-arounds are more 
readily accomplished. Thus, legitimate patent demand 
communications serve an important role in advancing 
technologies, providing consumers more choices, and ensuring 
the efficient self-policing of patent rights, preventing patent 
suits before they happen.
    We believe that legislation on patent demand communications 
should address three areas of concern.
    One, sanctions should be limited to those who send 
objectively false and misleading patent demand letter to large 
numbers of end-users to extort settlements. Routine business to 
business communications should not be swept in.
    Two, clear rules of the road, with objective guidance as to 
what such communications should and should not contain, not a 
list of vague and subjective good faith and bad faith factors 
for a court to weigh in determining what constitutes a bad 
faith patent demand letter.
    And finally, three, a safe harbor should be provided that 
clearly states what all patent owners remain free to do. By 
safe harbor, I mean a provision clearly informing all patent 
owners that they may: one, safely advise others of their 
ownership of, or right to license, or enforce a patent; two, to 
safely communicate to others that a patent is available for 
license or sale; three, to safely notify another, with 
reasonable specificity that they infringe a patent; or, four, 
to safely seek compensation for past or present infringement, 
or for a license to the patent. An appropriately crafted safe 
harbor will also help to insulate any legislation from 
challenge on Constitutional grounds as intruding on protected 
free speech.
    Clearly, the sending of large numbers of objectively false, 
misleading, and deceptive demand letters needs to be stopped. 
The key here is objectivity. A laundry list with a large number 
of subjective good faith or bad faith factors to judge whether 
a demand letter crossed the line must be avoided. Such lists 
provide no meaningful guidance to the sender of a patent demand 
communication. Such subjective factors will spawn unnecessary 
litigation, and are not likely to pass constitutional muster. 
Reasonable, clear, objective rules of the road are needed to 
guide normal business activities, rules that will not overreach 
and chill legitimate patent communications.
    We have seen a variety of bills working their way through 
the states. We have seen legislation covering what I will term 
legitimate patent demand communications, legislation not 
limited to end-users, legislation without safe harbors, and 
legislation with vague worded factors that could sanction a 
perfectly legitimate patent demand communication. These 
differences in state legislation make it difficult, if not 
impossible, to provide clear guidance regarding what form of 
patent demand communications will be permissible nationally.
    In conclusion, the public will benefit from the adoption of 
clear, balanced, and uniform guidance regarding the patent 
demand letters that constitute unfair or deceptive trade 
practices. This can be accomplished by the adoption of 
exclusive Federal legislation pre-empting state law directed to 
patent demand letters. Private enforcement under state Unfair 
or Deceptive Trade Practices laws should also be pre-empted, 
and limited to Attorney General enforcement.
    Thank you, Mr. Chairman. I will be pleased to answer to 
any----
    [The prepared statement of Mr. Skarvan follows:]
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    Mr. Terry. Thank you, Mr. Skarvan.
    Mr. Schultz, you are now recognized for your 5 minutes.

                   STATEMENT OF JASON SCHULTZ

    Mr. Schultz. Thank you, Chairman Terry, and Ranking Member 
Schakowsky, and members of the subcommittee. And, again, 
apologies for my delay getting here.
    At NYU Law I run a law and technology policy clinic, and 
for some people that is a bit of a confusion. They are like, 
what do you mean? What is a pro bono clinic doing in the law 
and technology area? Well, one of the things we do is we get a 
lot of e-mails and phone calls from some of these people who 
have received demand letters and can't afford to hire a patent 
attorney, and they want to know what to do.
    And I can tell you from my experience, now over 10 years 
generally, but specifically 7 years running pro bono clinics 
such as these, that, when I look at the letter, if it is some 
vague letter that doesn't actually specify what the accusations 
of infringement are, sometimes what all the patents are, and 
the claims at issue, it is hard for me to tell. It is hard for 
me to tell them anything. It is hard for my students, who I am 
supervising, and trying to teach to be lawyers, to tell them 
anything. And that is why I think this issue is very important, 
and I am very glad the subcommittee is taking it up, because 
this is not just about the shakedown. This is not just about 
the end-user or the small business who receives a letter, but 
it is also about helping them, if they can find help, to have 
the attorneys be able to advise them.
    It is one thing to defend a patent litigation, and we have 
seen a lot of statistics about how many millions of dollars 
that takes, but sometimes you can resolve these issues in good 
faith, if you have enough information. So I just want to 
highlight that this is about an intermediate step, as much as a 
final step, in sort of looking at this problem broadly.
    Now, who are the people who receive demand letters? You 
have heard about a number of folks who are in very precarious 
situations when they receive these letters. My clinic and my 
students, we often will advise very small entrepreneurs in 
terms of the size of their operation. These will be application 
developers who are just writing something for the iTunes or 
Google App store. They will be mom and pop Web sites who are 
trying to develop their own content. Some of these patents 
actually cover content, and the use of content, and how it 
interacts with technology. And some of them will be community 
projects. We have seen a lot of work right now developing civic 
technology to try and improve roads, to try and improve use of 
data, and look at the environment, improve water quality. They 
are all receiving patent demand letters too, many of them just 
as vague as the ones you have been hearing about.
    So in this role, there are sort of two problems that I 
think this committee could address. One is, as we have heard, 
that there are these vaguenesses that in some ways can even be 
deceptive when they are being asserted as a guaranteed 
infringement. So the patent owner will send a letter, say, you 
infringed this patent, but won't explain why, when I don't 
think even the patent owner knows, because this will be part of 
a campaign of general assertion, not specific to any individual 
or entity, but just, we believe this whole group of people out 
there somehow infringed. And they assert it as if it is the 
truth, but they don't even know, and that, to me, is deceptive. 
And the second is, as we have heard, when they have no 
intention to sue whatsoever, that the threats made are 
intimidating, and put the recipients in a position where they 
don't actually know what their options are.
    So when looking at this, I think we have just started to 
collect information about the problem, and I just want to say 
that efforts to try and collect more demand letters, such as 
trollingeffects.org, have been somewhat successful, but I would 
like to see more information so we can understand the scope of 
the problem.
    But turning to the solution, I think that, for me, these 
letters should be required to have specific allegations and 
information in them so that the recipient can look at them and 
assess what is actually going on, what are they being accused 
of? Several of the small entrepreneurs, and coders, and 
developers that I have talked to, they are actually technical 
people. They could actually try and figure this out, but they 
look at the letter, and they say, I have no idea what they are 
talking about.
    And part of that is not just because the patent is vague, 
but because there is no information about what that patent 
owner things that this small coder did, or what the application 
that they put up on the iTunes store does that they think 
infringes. And so that information would be extremely helpful, 
and to require that, to require the patent owner to do their 
homework, to look at what this recipient has done, would be 
extremely helpful for the people that my students and I help.
    I think it would also help those who are recipients of good 
faith demand letters as well, because let us say you do 
actually infringe the patent. Well, you should then figure out, 
are you going to design around it? Are you going to pay the 
license? Are you going to fight the patent because you believe 
it is invalid, even though you might actually fall into the 
claims? Those are legitimate decisions, and, again, more 
information early on helps resolve this at the lower cost.
    The other thing is that our public patent system is a 
public notice system. And I just want to reinforce that, as my 
final point, to say that it is as much about what the patent 
says when it is published at the Federal Register, but also 
when a patent owner is asserting it, they are asserting a 
public grant to them of a property right. And I think that the 
meets and bounds of that assertion, and when you trespass on 
it, should be as clear as anything else. Thank you.
    [The prepared statement of Mr. Schultz follows:]
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    Mr. Terry. Thank you.
    Mr. Chandler, you are recognized for 5 minutes.

                   STATEMENT OF MARK CHANDLER

    Mr. Chandler. Thank you, Chairman Terry, Ranking Member 
Schakowsky, members of the subcommittee. My name is Mark 
Chandler. I am General Counsel of Cisco Systems. I am here 
today to describe our experience with a new kind of scam. I am 
talking about a rip-off that is based on a formula that is as 
old as the hills, but dressed up as patent infringement and 
innovation protection. The scam artists, as you have heard, 
send out thousands of letters not to me, but to my small 
business customers, and they file lawsuits in the hope of a 
payday not based on the merits of the case, but on the fears of 
victims who just want a problem to go away. These victims, mom 
and pop stores, community banks, hospitals, car dealers, 
restaurants, aren't manufacturers of products. I do that. They 
are simply users, like you and me in our private lives.
    As Cisco's chief legal officer, I want to defend my 
customers, but we need your help in bringing some light, some 
sunshine, to these nefarious practices. Cisco was founded 30 
years ago to build products so incompatible computer systems 
could talk to each other. Today we are the world's largest 
manufacturer of Internet equipment, from backbone switches, to 
phone and video systems. Our annual revenue is about $50 
billion, and we directly or indirectly provide jobs to hundreds 
of thousands of Americans. Our products are used literally by 
billions of people around the globe, and are in tens of 
millions of American homes and businesses. We spend more than 
$7 billion a year on research and development. We hold over 
10,000 individual U.S. patents. We believe in a strong patent 
system.
    Now let me tell you a story which, unfortunately, is not 
unique. The story is not about patents. It is about using 
patents as the cover for a scam. Our story begins when a lawyer 
named Noah Whitley bought patents related to Wi-Fi from a great 
American chip maker, Broadcom, and created an entity that I 
think the somewhat cynically named Innovatio. Broadcom, for its 
part, didn't want the patents anymore, since they were near 
expiration, had been broadly cross-licensed to other chip 
companies, and were subject to binding contracts requiring 
licensing on fair terms.
    But Whitley wasn't deterred by that. He and his lawyers 
sent 14,000 letters to small businesses, cafes, bakeries, inns 
and hotels, a children's health clinic, basically anyone that 
might use Wi-Fi in their place of business. Did he tell them 
what specific products they had might infringe, might have? Not 
even a list of types of products? No. Instead, his lawyers just 
wrote, ``I represent an individual who has suffered injuries as 
a result of your company's business,'' and claiming that the 
Innovatio portfolio covers all Wi-Fi usage.
    Did his lawyers disclose that a huge proportion of Wi-Fi 
devices were already licensed, and therefore no more could 
legally be collected on those patents? No. Instead, he told 
them that almost a billion dollars had been collected in 
royalties on those patents, that thousands of companies had 
paid, without letting on that almost all those royalties were 
exclusively collected by Broadcom in cross-licenses that had 
little or nothing to do with these patents.
    Did they tell them that the patents related to industry 
standards, and had to be licensed on fair terms? No. Instead, 
they told them, and again I quote, ``We wish to license your 
company at a very affordable rate, far less than the cost of 
patent litigation. I can quote you a rate of less than $3,000 
per location.'' This for patents that a court later determined 
were worth pennies per chip, and equipment that these 
businesses had spent, at most, a few hundred dollars to buy.
    And did they tell them that manufacturers, like my company, 
were eager to defend them? No. Instead, they wrote that 
equipment manufacturers have not stepped in to defend any of 
their users. This means we can still sue your client, and they 
cannot expect equipment manufacturers to aid in their defense.
    Finally, for those who had the temerity to resist, they 
enumerated thousands of pages of documents that they said 
needed to be reviewed, meaning a mountain of legal fees. Now, 
sadly, this isn't an isolated incident, as General Sorrell, Mr. 
Brouillard, and others in the panel can tell you, but a 
dangerous trend.
    Let me close by suggesting four simple steps that would 
make it much harder to carry out these schemes. First, 
requiring anyone sending more than 10, or some other number of 
patent demand letters to someone who is not a manufacturer or 
re-seller of the product to file the letters in an online 
registry, so they are easy to find. Second, require them to 
include a list of model numbers which they believe infringe, 
the fact that the manufacturers may be required to defend, and 
contact information for the manufacturers. Third, require any 
such letter to include the names of the real entities or 
individuals who own the patents. And fourth, require the 
letters to include a list of all previous licenses, and whether 
the patents are subject to special licensing rules that apply 
to industry standards.
    While the FTC can already investigate and sue the most 
egregious patent scam artists, these simple steps will provide 
a basic level of transparency to protect innocent end-users. 
Requiring full disclosure about what is being offered for sale 
doesn't violate anyone's free speech. I stepped into that case, 
and I spent $13 million of my company's money to put a stop to 
this. The paycheck I get every other week says Cisco on the top 
of it, but every cent of it comes from my customers. That is 
why I am here today. That is why I am passionate about making 
sure they don't get ripped off by charlatans dressed up as 
innovators when they trust us to supply them with products.
    And, Mr. Chairman, if the predators are forced to come to 
me, once they have disclosed what they are after, I can 
guarantee they will get a fair fight. Thank you.
    [The prepared statement of Mr. Chandler follows:]
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    Mr. Terry. Thank you.
    Dr. Dixon, you are now recognized for your 5 minutes.

                   STATEMENT OF MICHAEL DIXON

    Mr. Dixon. Thank you, Chairman Terry, Ranking Member 
Schakowsky, and members of the subcommittee. I appreciate the 
opportunity to come here today. My name is Michael Dixon. I am 
president and CEO of UNeMed Corporation. We are the technology 
transfer and commercialization entity for the University of 
Nebraska Medical Center, so my testimony today will focus on 
preventing illegitimate and deceptive patent demand letters 
without modifying the U.S. patent system, or restricting 
university technology transfer offices.
    Universities are uniquely positioned here because we work 
with innovators at the university level, as well as downstream 
partners that are trying to commercialize our discoveries. I am 
going to have three main points today. One, universities have 
an enormous economic impact. Two, strong and forceful patents 
must be preserved. And three, ambiguous, vague patent demand 
letters are the lifeblood of patent trolls, and using a tool 
like the FTC makes much more sense than modifying patent law 
for a second time in two years.
    I would like to start by offering a bit of background on 
the scope of the University of Nebraska research and technology 
transfer. We are a proud member of the Big Ten, and have a very 
active research enterprise. Over the last 3 years we have 
invested $1.1 billion in research. Three quarters of that 
funding comes from Federal sources, such as NIH, NSF, and DOD. 
In that time, 625 new inventions were created, and that led to 
more than 150 licenses to companies. So that is 150 companies 
that are going to invest more money to bring these discoveries 
to life, and make the world a better place.
    Furthermore, 20 of those companies were created in 
Nebraska, creating economic development and jobs for Nebraskans 
in high growth, valuable companies. This licensing generated 
more than $37 million in revenue for the University of 
Nebraska, and that mean more money for research, and more 
discoveries. Now, we are just one of many universities that 
undertake this. Last year, as a total, U.S. universities filed 
over 22,000 patents. They executed more than 5,000 licensing 
agreements, and generated $2.6 billion in revenue. According to 
the Association for University Technology Managers, they added 
$385 billion to the U.S. GDP. This is a very big economic 
force.
    The economic impact is primarily based on patents. 
Companies are only interested in investing the millions or 
billions of dollars to bring these technologies to market if 
there is strong patent protection available. Quick story from 
our med center, as I mention in the testimony, the LeVeen 
needle electrode was invented at UNMC, and our industrial 
partner, Boston Scientific, brought it to the market. However, 
as the product neared FDA clearance, they found that it was 
necessary to enforce the licensed product against competitors. 
The parties both followed the appropriate protocol, worked out 
their differences through a patent infringement suit.
    At the end, there was a cross-license, some payments, and 
the products were successfully brought to the marketplace. The 
system worked appropriately. The take-home message here is that 
any action must preserve patent rights, and to continue to 
provide incentives for both large and small businesses that 
invest in technology that makes our lives better.
    There is a common theme with patent demand letters, and 
that is ambiguity. We have heard it already, bad actors are 
trying to scare, deceive, inappropriately extort money under 
the guise of patent enforcement, and they often use a shotgun 
approach, peppering the industry with hundreds of letters, 
often lacking in detail. As a technology transfer office, not 
only do we work with startup companies who have received these 
letters, but we have also been on the other side, and we have 
had to enforce our patent rights. When we make that important 
decision to send a demand letter, we find it is critical to 
provide detailed information for the recipient. In addition to 
a reasonable standard, it allows the recipient to make informed 
decisions.
    In my written testimony, I offered seven items that we have 
in a demand letter. Items three through seven of this are often 
missing, as we have heard before, in demand letters. And I will 
say that, as a university, we are very conservative. We don't 
take litigation lightly. When we send a demand letter, we are 
going to go do our homework. And so, for us, it is very 
important that the recipient know what claims they are 
infringing, and that we identify specifically what product it 
is that is infringing those claims.
    We want to make sure that the recipient knows who is suing 
them. Again, legitimate organizations don't hide behind shadow 
entities. If someone is infringing our patent, we want them to 
know who we are, and what our patent claims. Our goal is to 
settle the disagreement and provide as much information as is 
critical for that to occur. Some trolls use marketing entities 
that have no subject matter expertise, and cannot answer simple 
questions relayed in the demand letter. This, coupled with a 
shell entity, leads to a series of deadends and frustration for 
small businesses with limited resources as expenses mount with 
no answers.
    Another quick story from one of our partners. They received 
a demand letter from a patent troll last month. While the 
letter identified the patent being infringed, it did not give 
the owner of the patent, the role of the organization 
contacting the company, a knowledgeable point of contact, or 
adequate time to respond. In fact, the point of contact turned 
out to be a marketing firm that was just established to send 
these letters through a shell company. The take-home message 
here is reduce the ambiguity associated with patent demand 
letters, and you will reduce the power of the patent trolls.
    Thank you very much for your time. I look forward to any 
questions.
    [The prepared statement of Mr. Dixon follows:]
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    Mr. Terry. Thank you very much. And, I am sorry, Ranking 
Member Schakowsky has a meeting, so we are going to let her go 
out of order and ask the first set of questions. So, Ms. 
Schakowsky, you are now recognized for your 5 minutes.
    Ms. Schakowsky. I appreciate that, Mr. Chairman. Is there 
anyone on the panel who thinks that it would be inappropriate 
for Federal legislation, not getting into specifics, is there 
anybody who thinks that Federal legislation is unnecessary? OK.
    Attorney General Sorrell, you made a point of mentioning 
the issue of pre-emption in your testimony. I wondered if you 
could talk about that, though, on protecting whatever states 
do.
    Mr. Sorrell. We are currently in litigation under our state 
Consumer Protection Act for unfair and deceptive acts and 
practices in commerce against this MPHJ Technology Investment 
LLC. And as soon as we filed that action under our so-called 
UDAP statute, MPHJ removed the case to Federal Court, and 
promptly said two things. One, that since this was in the 
patent arena that the lawsuit is not only frivolous, and filed 
for political purposes, but that we are totally pre-empted 
because patents are exclusively within the province of the 
Federal government, and, secondarily, that we lack personal 
jurisdiction over them for simply asserting patent infringement 
by sending these letters.
    And that is why we are asking the Congress, if the Congress 
takes action here, to state clearly that AGs have legitimate--
they are not pre-empted when there are unfair and deceptive 
acts and practices in the guise of an assertion of patent 
infringement, and that states are able to, without being pre-
empted, enact statutes that prohibit bad faith assertions of 
patent infringement. So we are fighting that in Federal Court, 
U.S. District Court, in Vermont right now. And, given the fact 
that Nebraska, Minnesota, New York have already----
    Ms. Schakowsky. You said Wisconsin?
    Mr. Sorrell. Wisconsin hasn't yet, but Wisconsin has just 
enacted a statute on bad faith assertions of patent 
infringement, but the AGs of those other states have taken 
action, and in virtually each case been run up against this 
argument, you don't have any business here, you are pre-empted, 
because this is patent----
    Ms. Schakowsky. Forty-two AGs you said, right?
    Mr. Sorrell. Forty-two AGs signed a letter to Senate 
leadership about matters that are, actually just this week, 
moving forward in the Senate.
    Ms. Schakowsky. OK. Let me just go through a list of things 
we have heard from a number of you, things that should be in 
these letters, in the demand letters. If anyone thinks that 
they should not be in a demand letter, let me know. Raise your 
hand. Identification of the patent being infringed, 
identification of the owner of the patent, contact information 
for a person who can discuss resolution, identification of each 
claim of the patent being infringed, identification of the 
infringing device, method, or service. OK, which one was that? 
Identification of each claim?
    Mr. Skarvan. Yes, identification----
    Ms. Schakowsky. OK.
    Mr. Skarvan [continuing]. Of each claim. I think it was 
referred to earlier that, certainly, on behalf of the 21C, a 
number of the members have extremely large equipment not 
readily accessible. Information is not readily accessible 
regarding that piece of equipment. We usually rely on trade 
shows, and perhaps advertising, regarding certain features, or 
possible benefits that seem to look like something we have a 
patent on. So when I am asked to provide analysis, or identify 
a claim against a product, I simply can't comply with that 
level of detail. I am not in possession of that information.
    Ms. Schakowsky. OK. It is on the record. Thank you. 
Identification of the infringing device, method, or service, a 
description of how the device, method, or service infringes, 
identification of entities, other than the patent owner, who 
may benefit from enforcement, identification of all entities 
that had been granted--go ahead.
    Mr. Skarvan. I think you just have to be clear, when you 
talk about benefit from enforcement, that, I think, this 
additional detail is forthcoming, because there have been a 
number of proposals talking about how to identify that. 
Ultimately you are looking for somebody that, you know, in a 
lawsuit, their damages, if there is a fee paid, they would take 
and participate in that reward.
    Ms. Schakowsky. Identification of the parent company of the 
patent.
    Mr. Skarvan. I will say, the devil is in the details. On 
the face, that looks simple. I have heard other companies 
state, for example, Intellectual Property Owners' Organization, 
that that in itself can be difficult to ascertain and provide 
correctly.
    Ms. Schakowsky. OK. Identification of all entities that 
have been granted a license to the patent.
    Mr. Skarvan. Again, I think you start to get into a little 
bit of a burdensome situation with a company with tens of 
thousands of patents to understand exactly the entire licensing 
spectrum regarding that patent.
    Ms. Schakowsky. OK.
    Mr. Dixon. Also, on that one, I will say, from the 
university standpoint----
    Ms. Schakowsky. OK.
    Mr. Dixon [continuing]. If you are looking at non-exclusive 
licensing, sometimes those lists get very long, and sometimes a 
company's trade practices, they request some confidentially 
that they, in license, that technology for competitive 
advantages. So that may become a little difficult.
    Ms. Schakowsky. OK. This is helpful. Notice to the 
recipient that they may have the right to have the manufacturer 
defend the case.
    Mr. Skarvan. I am sorry, could you repeat that?
    Ms. Schakowsky. Notice to the recipient that they may have 
the right to have the manufacturer defend the case. And, last, 
some factual basis for the licensing fee, or settlement amount 
demanded, if any.
    Mr. Skarvan. Well, again, I come back to, I think, the very 
basic elements. These all require additional, I think, 
discussion and explanation, because these concepts can be very 
complex. I think when you come to the very basic elements that 
should be the content of a patent communication representing a 
demand on something, the identity a person or entity with a 
right to enforce the patent or patents forming the base of the 
demand, and identification with at least one product, service, 
or technology. Those, I think, are the key elements. When you 
add to those elements, I think you are getting into some very 
definitional and perhaps burdensome, complex disclosures that, 
really, at the point in time, are benefitting the assertion.
    Ms. Schakowsky. OK. My time is expired. I appreciate that. 
So, we can inquire among all of you in writing responses to 
these suggestions, or just proposals. Yes. Thank you. I hear 
you on the burdensome issue.
    Mr. Terry. All right. Well, first of all, I think the 
nature of Ms. Schakowsky's questions were pretty similar to 
what I was going to ask, but it shows that if we are going to 
do, and I would say it is likely that we would draft something 
sometime in the near future. What we are trying to figure out 
is what, if we draft a bill, needs to be in there, and it 
appears to us that we need to itemize, or be prescriptive, in 
what has to be in a demand letter. So that is why Ms. 
Schakowsky did a list of things that have been discussed that 
should be in there.
    Let me ask you just more generally, starting with you, Mr. 
Sorrell, or AG Sorrell, what are the characteristics that 
should be in a valid patent demand letter?
    Mr. Sorrell. It shouldn't be any question of who is 
asserting the infringement. There should be evidence of 
investigation, or in depth analysis of this particular 
recipient's use of the technology that is allegedly violative 
of the patent. It should be clear if there are others with an 
interest in this assertion of patent infringement, and who they 
are. There should be legitimate addresses, contact information, 
for those asserting the infringement. If this patent has been 
the subject of a final decision, administrative decision, or a 
judicial case against the patent that is being asserted, that 
information should be reflected, at least for starters, and the 
demand should give a reasonable amount of time for the person 
to respond. And there shouldn't be this undue burden thrown to 
the recipient of a letter to prove your innocence, if you will.
    Mr. Terry. Right. As quickly as possible, Mr. Brouillard--
--
    Mr. Brouillard. Yes, sir.
    Mr. Terry [continuing]. What points should be in a demand 
letter?
    Mr. Brouillard. I would agree. I think it is obvious you 
can't receive a letter that simply says, A, we did an 
investigation, and found that you used our technology, and here 
is a list of numbers. It needs to be clearly identified as to 
what is being asserted, what investigation was conducted, how 
do you know that we are violating your patents? And, obviously, 
for someone like myself, who is totally ignorant of this issue 
until this all came up about a year and a half ago, there has 
to be something more than simply a list of numbers. To me, I 
don't even know if those numbers were legitimate patent 
numbers.
    Mr. Terry. OK. More----
    Mr. Brouillard. More specificity in the claims that are 
being made.
    Mr. Terry. Mr. Skarvan, I am going to ask you the same 
question, but ask a little bit more clarity, because it does 
seem like you can identify what is being infringed. If you saw 
something at a trade show or an advertisement, you at least 
have a pretty good hunch that there may be an infringement. So 
it----
    Mr. Skarvan. I can suspect, because I obviously can't see 
inside, and I am stuck with advertising. I do want to bring up 
a point that we discussed a few things, and I want to 
differentiate a bit, if you don't mind, the difference between 
business-to-business communications, and the egregious actions 
I have heard here were end-users that are being targeted. And I 
will just say, in business-to-business communications, and 
patent demand letters, I think, generally under the law, the 
way it plays out, less is more, and let me explain that.
    The number one concern prior to all this legislation that I 
had when I sent out a patent demand letter, or any member of 
the 21C sends out a patent demand letter, is does that contain 
enough information that the recipient feels immediately 
threatened, and they now have potential jurisdiction, they call 
it declaratory judgment jurisdiction, to say, look, this entity 
has threatened me. I cannot continue on with my investment 
without some certainty here on this issue. They brought the 
threat, I want it determined now. And all of a sudden you are 
in a patent lawsuit under what they call a DJ action.
    And so when we send out letters, they tend to be a first in 
a series of letters. And when people point to a specific patent 
demand letter, all I can think of is, I have a series of 
letters to go out, none of them are the same. And they 
generally have these three things, but they don't have to, 
because I have different target audiences I am sending this 
letter to. So I just want to make sure that this kind of 
correspondence, which I think less is more, keeping it out of 
the courts, doesn't include a lot of these details.
    And so, in answer to your question, I don't always have 
access to the information. I don't have that detail, nor may I 
want to even put that level of detail or threat in my letter if 
it ends up inviting a DJ action, and brings a patent suit in 
court.
    Mr. Terry. All right. The other three witnesses probably 
will have to submit that answer in writing, and I apologize 
that my time has run out.
    So, at this point, Mr. Welch, you are recognized for 2 \1/
2\ minutes. No, Mr. McNerney, you are recognized for 5 minutes.
    Mr. McNerney. Thank you for the full 5 minutes, Mr. 
Chairman. I think it was really good testimony. I thank you all 
for coming this morning. One of the things that I think was a 
matter of disagreement among the witnesses is how to enforce 
this. I mean, there is a pretty good agreement that the letters 
should have a degree of specificity, but, as Congress, can we 
write a law that is flexible enough that it will be effective, 
that the patent trolls won't be able to get around, and so on, 
or should invest the FTC with the authority to do that in a way 
that would be effective?
    Mr. Dixon, I think you had mentioned that you thought the 
FTC. How would we empower them, or do you believe they already 
have enough authority in the existing statute?
    Mr. Dixon. I believe the FTC does have some authority here, 
and it would be wise of Congress to remind them that they do 
have some authority on some unfair trade practices. I think 
giving a little more teeth to the FTC, and allowing them to 
look at these broad, vague patent demand letters, while still, 
I agree, allowing business to business communications to still 
occur, and for business to transact that way, and not having 
that fall under this FTC action, is very important. But I think 
giving them a little more authority would allow business to 
still go on, and for these legitimate actions to still take 
place, while not affecting general patent law itself, which is 
the lifeblood of many of our businesses.
    Mr. McNerney. OK. Mr. Chandler, would you like to comment 
on that?
    Mr. Chandler. Yes. I would make one distinction. Mr. 
Skarvan referred to business-to-business, and I think what we 
are referring to here is letters addressed to end-users. The 
end-users may, in fact, be small businesses, and I am not sure 
that some of the issues that Mr. Skarvan had with some of 
Ranking Member Schakowsky's enumerated proposals would apply in 
the case of an end-user communication, as opposed to when you 
are dealing with a competitor who is also a manufacturer, and 
where you have this dance that goes on in dealing with 
potential infringement allegations.
    In looking at the end-user situation, I think the space 
where Federal legislation would be very helpful would be to 
establish clearly that it is an unfair business practice, in 
those types of communications to end-users, to not include 
certain types of information.
    The FTC today can go after egregious misbehavers who are 
misleading and deceptive, but once you set a very clear set of 
standards, and also require transparency on those letters, 
manufacturers like me can step in. It almost becomes self-
enforcing once you put some sunshine on these activities. And 
that is why there is a great opportunity to get something done 
here without creating a regulatory structure around it. What is 
really needed is daylight.
    Mr. McNerney. So you feel that Cisco can do a good job in 
defending your customers, if you have the right tools to do 
that?
    Mr. Chandler. If we know this is going on, we can step in 
and do it. And if it is visible what is going on, these people 
will be forced to stop because the group of people who are 
being attacked can also band together and take action, as Mr. 
Brouillard has pointed out. But sometimes it takes some 
daylight before you know that this is actually happening. So 
transparency is really almost a solution in itself here.
    Mr. McNerney. Thank you. Mr. Skarvan, one of the things you 
recommended was that sanctions be imposed on bad actors. 
Wouldn't it be just easy for them, a bad actor, to put up 
another banner and continue on? Even though the first label is 
sanctioned, they can go to another label and carry on their 
activities?
    Mr. Skarvan. Well, I think what you stated is correct. It 
is very, very difficult to capture some of these actors, and I 
think it is very difficult in capturing them with a single 
demand letter that does or does not meet, if you want to say, 
the requirements set forth in legislation. What I think works 
more effectively is to capture their behavior. And the behavior 
we are seeing, I think it has been said today, is that these 
hundreds and thousands of letters go to end-users.
    And that is where you have got to really focus in on, and 
begin asking questions, because now you have got the behavior, 
and the business model I think people here are objecting to, 
these hundreds and thousands, I think it was 16,000----
    Mr. McNerney. Yes.
    Mr. Skarvan [continuing]. Letters nationwide. And that is 
where I think the FTC, uniform laws, and certainly uniform 
enforcement by the Attorney General, they act as a clearing 
house to identify this rampant behavior. And once you can see 
that behavior, now I think it is pretty easy to begin the 
inquiry into the entities engaging in that behavior.
    Mr. McNerney. Thank you. Thank you, Mr. Chairman.
    Mr. Terry. Thank you. Now recognize Vice Chairman of the 
Committee, Mr. Leonard Lance. You are recognized for 5 minutes.
    Mr. Lance. Thank you, Mr. Chairman. As I understand it, 
there are five or so existing state laws on this issue, and 
several other bills are awaiting signature by a governor, and 
there are as many as 19 bills pending in state legislatures. 
Given this situation, I would be interested in the panel's view 
as to whether Federal legislation is needed. Attorney General?
    Mr. Sorrell. Yes, Federal legislation is needed, and 
hopefully included in that legislation would be an express 
statement that the states are allowed to enact their own 
statutes against bad faith assertions of patent infringement, 
and/or to enforce their standard Consumer Protection Acts.
    Mr. Lance. Thank you. Others on the panel?
    Mr. Brouillard. Yes, I agree. I think that U.S. patent law 
is Federal legislation, and I think that anything that can be 
done to strengthen that legislation should be. In addition, I 
think to get back at the Congressman from California's comment, 
it is going to take a concerted effort on both the Federal and 
state level, in some cases, to do that. And the last point I 
would make is that if you had Federal legislation, then it is 
more uniform across all states, rather than a hodgepodge for 
companies that operate in multi-states to try to deal with.
    Mr. Lance. Thank you. Others on the panel?
    Mr. Skarvan. And I agree, and I am glad you brought that 
up, because not only is Federal legislation needed, but we need 
uniform legislation that provides the same, if you want to say, 
rules of the road across the states. States certainly can 
enforce through the AG, but as far as having different state 
statutes to provide different rules of the road, different, if 
you want to say, private causes of action, some have safe 
harbor, some have no safe harbor. I mean, looking for a little 
bit more uniformity.
    Mr. Lance. Thank you.
    Mr. Schultz. I would like to just add two things. One is 
that the patent system is an incentive system, and the Congress 
is in a great position to sort of balance those incentives. So 
if you want patent owners to do more to make sure that certain 
recipients get the information they need, you are giving them a 
patent, and you can require them to do things. I think that is 
a nice balance there that doesn't preclude states, but it kind 
of gives you that power.
    The other thing is this bottom-feeder model, this model 
where they just send out thousands of letters, is premised on 
the idea that they don't have to be specific to the individual 
recipient, and I think that really needs to be in there 
someone, that core specificity, else they will just re-draft 
the letter in some other way.
    Mr. Lance. Thank you. Others on the panel?
    Mr. Skarvan, you referenced safe harbor language in your 
comments, and in your testimony you suggest that safe harbor 
language be included. Do you have a specific idea what type of 
model you would like regarding safe harbor? Is there a 
provision in one of the state statutes that we might examine, 
and, if not, what would be an appropriate safe harbor 
provision, from your perspective?
    Mr. Skarvan. I think the most recent state that enacted a 
safe harbor, and worked through some of the language 
difference, was Illinois----
    Mr. Lance. Illinois, yes.
    Mr. Skarvan [continuing]. Statute, and when you look at the 
safe harbor, I think it is helpful to look at it in combination 
with the cause of action being limited to those letters sent to 
the end-users, and----
    Mr. Lance. Yes.
    Mr. Skarvan [continuing]. Have a good definition for end-
users, including businesses, not for resale, in that statute. 
And they also have, not the subjective fact, but very clear 
false behaviors, along with very clear requirements of the 
patent owner, the patent number, and the general product or 
service it covers.
    Mr. Lance. So, from your perspective, we might examine the 
Illinois provision as a model for a Federal provision?
    Mr. Skarvan. Yes. We have suggested that to other states.
    Mr. Lance. Thank you. Others on the panel on whether there 
should be a safe harbor provision, and if so, what it should 
look like? No? Thank you, Mr. Chairman. I yield back the 37 
seconds.
    Mr. Terry. Thank you. At this time I recognize gentleman 
from Vermont to ask questions to another gentleman from 
Vermont----
    Mr. Welch. Well, and others as well.
    Mr. Terry [continuing]. Mr. Welch.
    Mr. Welch. Thank you. I actually wanted to start with 
Professor Schultz. What options does a small business or 
startup company currently have when they receive one of these 
vague threatening demand letters?
    Mr. Schultz. So I think that, if they are taking a rational 
approach, they want to think about this as, you know, first, as 
we doing what they say? Are we infringing some patent? And then 
they have a couple of options. One is they can challenge that 
assertion, right, in that they can get an attorney, if they 
could afford one, or get pro bono counsel.
    The second is they can decide to change what they are 
doing, or design around that, and that is where the specificity 
really helps them. If they realize that it is only one small 
piece of whatever they are designing or doing, they can maybe 
change that, and then maybe settle a little bit, but move 
forward.
    And then the third is they can simply just pay to get out 
of the way, which what so many of these are doing. So I think 
we want to give them valid choices, and the only way to do that 
is to have the specific information.
    Mr. Welch. And then what is a remedy if there is an absence 
of specificity?
    Mr. Schultz. You mean in terms of what?
    Mr. Welch. For the receiver of that letter.
    Mr. Schultz. I mean, they are really stuck in a kind of 
quandary, because they don't know what to do. They can't 
explore those other choices. They don't know how to change what 
they are doing. They don't know whether to challenge it, 
because the allegations aren't there, so the only rational 
choice left is to pay off the sender.
    Mr. Welch. OK. I want to go back to Mr. Sorrell, and have 
you think about this question too, because I might want to get 
your point of view. But you have been really advocating that 
this is a consumer protection issue, and that there has to be 
some role for the states, and it would be a mistake for the 
Federal government to pre-empt. Just elaborate on that a little 
bit.
    Mr. Sorrell. These efforts are so widespread that there is 
plenty of work for both Federal regulators and state 
regulators. If you look at it from the drug trafficking 
analogy, the Federal authorities typically take, you know, the 
cartels and the large dealers, and they leave the street 
dealers to the states. If we are looking at assertions of 
pattern infringement, I believe the FTC does have authority, 
but it can't police this spectrum entirely, and there is a role 
for the states.
    Mr. Welch. Professor Schultz, do you think that makes 
sense, in terms of a practical way to protect innocent victims, 
like the Lincoln Street example? You know, a small nonprofit, 
and those options you laid out, I think for them, mainly, they 
are just terrified, and they can't make that phone call to the 
lawyer because they know the meter is running once that 
happens. And they hope it goes away, and it doesn't.
    So it seems to me that what General Sorrell is suggesting, 
that there be a consumer protection element, a local ability of 
local consumer protection division, and an Attorney General's 
office closer to the scene to be able to protect, I should say, 
the rights of some of these small businesses.
    Mr. Schultz. Absolutely. I think that is an essential 
component. But I do think that, since the patent law is 
Federal, it is also worth looking at the incentive systems, and 
allowing the option that you could provide consequences in the 
Federal system too. Because----
    Mr. Welch. Right.
    Mr. Schultz [continuing]. Some of these things do go to 
court, and when they go to court, there are consequences to 
whether the letter was sent, and what it said.
    Mr. Welch. So if we provided consequences at the Federal 
level, I mean, I like what you are saying about the incentives, 
that makes a lot of sense to me, would we want the benefit of 
local enforcement of those standards that we have established 
here at the Federal level?
    Mr. Schultz. Absolutely. I think both can coexist, and, in 
fact, contribute to the same goal.
    Mr. Welch. OK. By the way, do patent holders, I will stay 
with you, Professor Schultz, other than the trolls, routinely 
target end-users, and could there be any legitimate reasons to 
send demand letters to end-users?
    Mr. Schultz. So I will say generally no, except that this 
term end-user, I think we have to be careful, because these are 
very clever lawyers, right, who run these companies, these 
trolls. And so if you define something too specifically, in 
terms of one protected group, you know, they will try and find 
a way around it.
    So I just want to be careful, because, again, a lot of the 
folks who call my clinic, and are looking for pro bono 
assistance, are people who develop apps. And they are, like, 
two or three small, you know, it is a small business, two, 
three people, just trying to create something to put on the 
iTunes or Google store, or whatever. They are not end-users in 
a sense, except they are the end-users of the Internet.
    Mr. Welch. Yes.
    Mr. Schultz. Right. So I just want make sure that if we are 
going to cover people who are using standard technology, it is 
not just only the physical stores, but it is also anyone who 
kind of is using a product or service from someone else.
    Mr. Welch. So I will ask the whole panel, is there--I have 
only got 18 seconds.
    Mr. Terry. Yes.
    Mr. Welch. Well, I guess I won't. Well, the question I was 
going to ask, but then I will yield before there is an answer, 
is what evidence do we have about the effect of patent trolls 
on suppressing innovation?
    Mr. Terry. All right. That would be a great answer for a 
written question----
    Mr. Welch. All right.
    Mr. Terry [continuing]. That we will submit. At this time--
--
    Mr. Welch. I yield back.
    Mr. Terry. Thank you. Gentleman yields back. Recognize the 
gentleman from Texas, Mr. Olson, for 5 minutes.
    Mr. Olson. I thank the Chair. And, first of all, I don't 
like the term patent trolls. These aren't patent trolls. They 
are patent bullies, like the bully on the playground in 3rd 
grade, the bully every Monday who comes to school, threatens to 
beat you up if you don't give him his lunch. I mean, these are 
patent bullies.
    And, thinking out of the box on how we stop this behavior, 
in my home State of Texas, again, not directly applicable, but 
they did something in 2011 called basically loser pay. My state 
Senator, Joan Huffamn, got that thing passed. It has been going 
on for about 3 years now, and what they have done, not so much, 
again, in patent protection, but just sort of legal protections 
for some of these frivolous lawsuits, they basically empowered 
the judge, the trial judge, to say, this is garbage, throw it 
out. He gets the initial filing, say, frivolous, done.
    If that doesn't work, OK, how about I send it up to--they 
are going for the home run. We know it is really bad, but we 
want to take that shot, maybe knock that thing out of the park. 
And if that is the case, I can send it straight from my court 
to the Appellate Court, get this taken care of quickly, so, 
again, the aggrieved party is not paying legal bills on, and 
on, and on. Also, for the small guys, it was less than 
$100,000, you know, expedited civil action procedure.
    And so, to ask all the panelists, is that something we 
should look at? I mean, I know there are lots of pros and cons, 
more Federal involvement, pre-emption, that type of stuff, but, 
again, how can we take this ham away from these patent bullies, 
not patent trolls?
    Mr. Brouillard. If you don't mind, I will take the first 
shot at it. I certainly believe that part of the legislation 
should include some opportunity for the party that has been 
aggrieved in this situation to have their costs reimbursed. I 
suspect if I got a letter from Caterpillar, I would pay 
attention. But when I get a letter from an entity I don't know 
that just lists a whole bunch of numbers clearly, for someone 
like us, or any small business, to defend, we have been told it 
is a million dollar cost to defend a patent lawsuit. We are 
certainly not in a position to do that, and I really do believe 
that if a patent troll, or if a patent bully, ran the risk of 
having to reimburse someone, they would think twice about doing 
it in the first place.
    Mr. Olson. General Sorrel, any comments, sir? And my 
parents are voters in Vermont.
    Mr. Sorrell. In the Vermont statute, it allows for awarding 
attorney's fees. But, again, to recover, you have to establish 
that there was a bad faith assertion of patent infringement. 
And I think some of the concern about AGs getting involved in 
this arena is, are we going to sort of muddy the waters?
    Speaking for myself, and pretty comfortably for the rest of 
the AGs, we do not want to try to get in the middle of a fair 
fight between two companies, where it is a reasonable fight as 
to whether this patent exists, and what it controls. We are 
really trying to deal with the bottom-feeders, and we think 
that the current Federal standard of the awarding of fees in 
patent cases ought to be eased so that they are awarded more 
frequently. I am not prepared to say that theloser pays in 
every case. That might be an overreach there.
    Mr. Olson. Mr. Skarvan?
    Mr. Skarvan. Well, I would just say that some of these 
concepts, I think they can work, conceptually. Generally they 
fall down if you try to apply them just to one side of the 
coin, so they have to be available, similar to bonding, to both 
parties, because they are pre-determining that somebody 
actually is the bully ahead of time. It all comes down to what 
actually is going on. Certainly wouldn't want to be one-sided 
and attach that type of penalty to a legitimate patent 
communication.
    Mr. Olson. Yes, suddenly the bullied becomes the bully, 
maybe, in that situation.
    Professor Schultz, any comment, sir?
    Mr. Schultz. Yes. So I do think that many of the efforts 
that are being supported in Congress right now, I think, are 
comprehensively looking at the problem, and I think that 
linking them together, and making sure they all fit well 
together, is good. So I think that, for instance, the type of 
demand letter, or the kind of information that is or is not 
shared, and how vague, and how deceptive it is may well be 
appropriate factors to pay into a fee award, right, or to say 
an adjustment of whether damages are available for willful 
infringement or not. These kind of things, I think, are linked, 
and are important. But I do think that the whole problem needs 
to be dealt with on a couple different levels.
    Mr. Olson. OK. Mr. Chandler, I have got time, sir. You have 
got one more swing to take it out of the park?
    Mr. Chandler. You know, the Innovation Act that passed the 
House with overwhelming bipartisan support includes a provision 
for some cost-bearing when a case is completely unreasonable. 
In this particular type of problem that we are talking about 
today, though, it is unclear how that plays out, because these 
things don't generally go to litigation, because they get 
settled, because you have someone who is using Wi-Fi in their 
business, and is told you can spend hundreds of thousands, or 
millions of dollars to defend this, or you can just pay us 
$2,000. So I think----
    Mr. Olson. Yes, the bully.
    Mr. Chandler [continuing]. The promise of that might be a 
looser rate. I don't call them trolls because I don't like to 
demonize my adversaries. I would just say they are like rats 
running through a maze, and we need to take the food away at 
the end, and then they will stop going through the maze. And 
that is a systemic issue that we can address that won't result 
in a lot of litigation and awards at the end.
    Mr. Olson. Thank you. My time restrictions are very brief, 
sir.
    Mr. Terry. Thank you----
    Mr. Olson. Mr. Chair----
    Mr. Terry [continuing]. Mr. Olson. Now recognize the 
gentleman from Illinois, Mr. Rush, for----
    Mr. Rush. Well, thank you, Mr. Chairman, and it has been 
quite interesting. I want to thank the witnesses for appearing 
before this subcommittee. Earlier, when Congressman McNerney 
asked about the FTC's authority, and Dr. Dixon mentioned that 
the FTC already has authority, and could be encouraged to use 
that authority. Perhaps, Mr. Chairman, we should encourage the 
FTC to be more aggressive on the issue of patent trolls, be 
they bullies, or rats, or however you want to define them.
    However, I am interested in understanding what additional 
authorities the FTC could use in this space. For example, 
General Sorrell, the FTC does not have authority currently to 
collect civil penalties under Section V for unfair and 
deceptive practices. General Sorrell, shouldn't the FTC be able 
to bring cases for more than just injunction relief, and also 
hitting these bad actors, be they rats or trolls, directly in 
the pocketbook? And also, are there other authorities that 
would be helpful, such as ACA rulemaking, on declaring certain 
actions to be, ``per se, deceptions''? For example, if a demand 
letter does not include the patent number, or numbers, couldn't 
they just be, based on that, declared, per se, deceptions? Or--
--
    Mr. Sorrell. Thank you. In my view, the Federal Trade 
Commission does have authority in this arena right now, and 
that is in part evidenced by the fact that MPHJ Technology, 
that when the Federal Trade Commission started investigating 
MPHJ Technology, it turned right around and it sued the Federal 
Trade Commission to halt the investigation. That being said, I 
would suggest that there be a communication to the Federal 
Trade Commission about the other issues that you raised, 
whether they think that the Congress might underscore or 
enhance the authority that they currently have.
    My concern is that, if legislation just speaks to enhanced 
authority for the Federal Trade Commission, and you don't speak 
to the states' authority to enforce our statutes, it will be 
argued that you were consciously trying to cut the states out 
of the equation.
    Mr. Rush. And are there any other witnesses who want to 
comment on increasing the authority of the FTC? Mr. Chairman, 
thank you, I yield back.
    Mr. Terry. Thank you, Mr. Rush, and I appreciate your 
input. Now recognize the gentleman from Ohio, Mr. Johnson.
    Mr. Johnson. Thank you, Mr. Chairman, and I appreciate the 
panel being with us today.
    For all of you, and you can answer in whatever order you 
would like, what role should the Federal Trade Commission have 
regarding patent demand letters? Anybody want to comment?
    Mr. Sorrell. I think I just answered that question, so I 
pass it down the line.
    Mr. Schultz. I will just add one thing, which is that I do 
think this question of understanding the problem, I think we 
have a pretty good handle on it, but I think, for instance, one 
of the questions is, what are the subpoena powers of the FTC, 
in terms of getting access to the letters that a particular 
entity might have sent out that they are not aware of, things 
like that. And I do think that, if we are going to support the 
FTC investigating, or state AGs as well, that they do need to 
understand the problem, and they do need to see the letters 
that have gone out, and the practices of the entities. So I 
think that information collection is an important aspect.
    Mr. Johnson. OK. Mr. Chandler?
    Mr. Skarvan. Can I speak to the----
    Mr. Johnson. I am sorry, go ahead, Mr. Skarvan, yes.
    Mr. Skarvan. Thank you. I speak to just the consistency and 
uniformity, and ensuring that consistency and uniformity, and 
providing that clearinghouse function to identify the bad 
behaviors, and giving comfort to the company that sends a 
handful of demand letters that they won't be brought into a 
private cause of action at the state level by perhaps a 
recipient who wants to play mischief.
    Mr. Johnson. OK. Mr. Chandler?
    Mr. Chandler. Thank you. I think the FTC has the authority 
today to go after, for unfair business practices, the most 
egregious cases. The opportunity that you have on legislating 
on this is to set some very, very clear standards for what a 
demand letter to end-user or a small app developer would have 
to include so that you have an immediate step that the 
commission can take to try to demand transparency.
    So rather than creating a regulatory structure around the 
ultimate enforcement action for the underlying acts, by making 
very clear what a demand letter has to have, I think you stop 
automatically a lot of this activity, because these entities 
that are doing this can't stand to have the sunshine expose 
what is going on. And just setting that standard for needs to 
be in the letter I think will go a long way toward solving the 
problem itself.
    Mr. Johnson. OK. Mr. Dixon, in your testimony you 
distinguished between letters with allegations of infringement 
seeking compensation, versus letters marketing inventions, 
seeking investment.
    Mr. Dixon. Yes.
    Mr. Johnson. How are these letters different from each 
other, and what do you say that distinguishes them? Or what do 
the letters say that distinguishes them?
    Mr. Dixon. So I think this really gets back to the business 
communications that we would have as a university. When we are 
trying to market our technologies, we are trying to incentivize 
investment. But oftentimes within these letters, we are 
identifying intellectual property that we own, and we are 
letting a company know that they may be interested. For 
example, I have got a cancer vaccine. I know Eli Lilly works in 
cancer. I am going to send them a letter saying, would you be 
interested in developing this technology? I think the major 
difference here is that patent demand letters will contain the 
threats of litigation, and often require that license.
    Now, as has been stated earlier, these trolls are very 
bright, and so one of the things, I think, that will be 
difficult is to craft the right legislation that will prevent 
the troll-like activity, while not stopping these typical 
business communications that are vital for us to continue on. 
Because universities and companies need to send letters to one 
another identifying potential IP that we might want to cross-
license, or develop together, we want to make sure that that 
does not get caught in any sort of FTC regulation that slows 
the pace of innovation and development.
    Mr. Johnson. OK. All right. Mr. Skarvan, you stated you 
want a safe harbor to preserve your rights to put companies on 
notice. What is the difference between the manner in which you 
communicate your patent rights, and the manner in which a 
patent troll communicates his alleged patent rights?
    Mr. Skarvan. Well, I think there is a whole spectrum of, 
again, using the word patent trolls, but maybe better word in 
sum of this, of using the patent demand system, or patent 
demand letter. I think any patent holder who is engaging in 
good faith communications is entitled to those safe harbor 
rights. When you start talking about an abuser, and somebody 
that is acting in bad faith, objectively bad faith, false 
statements, then that person is not entitled to those safe 
harbor rights, because they are not acting in good faith.
    And so the difference really isn't so much the label of the 
person exercising the patent right, it is whether or not they 
have engaged in this abusive behavior. Then they are not 
entitled, because they have been acting in bad faith to those, 
if you want to say good faith rights that everybody has.
    Mr. Johnson. OK. All right. Thank you, Mr. Chairman. My 
time has expired.
    Mr. Terry. Thank you. Now recognize the gentleman from 
Illinois, Mr. Kinzinger, for 5 minutes.
    Mr. Kinzinger. Well, thank you, Mr. Chairman, and thanks 
for holding the hearing, and to all of you, thank you for 
coming out. Especially nice to see the folks from CAT here. It 
is a good home state company. I am grateful for the panel's 
insight on these issues of the abusive patent demand letters. 
In my office, we have heard from several consumer groups, 
realtors, credit unions, and banks, and they share a common 
message, which is patent demand letters are often deceptive, 
confusing, and intimidating.
    It is certainly concerning that some entities are purposely 
misusing patent demand letters. These tactics hurt job 
creation, hinder innovation, and place a significant financial 
toll on consumers, businesses, nonprofits, and other actors 
within the economy. As we consider these abusive tactics, as we 
have had a lot of discussion today, it is important to keep in 
mind that demand letters do serve a legitimate purpose in the 
patent system, and any reform should ensure legal patent 
holders' rights are protected. With these considerations in 
mind, I have a few questions I would like to ask.
    I will start with Mr. Skarvan. You probably know the 
Illinois bill better than I do, but could you tell me any 
shortcomings that the Illinois bill has, and then where the 
Federal government would have a role in, in essence, pouring 
cement over that in order to protect the rights of companies?
    Mr. Skarvan. Shortcomings? I actually applaud Illinois for 
coming up and crafting a compromised solution.
    Mr. Kinzinger. Well, I guess let me rephrase shortcomings. 
Instead of saying where would you believe that in Illinois the 
Federal government then would need to step in after Illinois 
has done what it has done?
    Mr. Skarvan. Well, looking at the Illinois language, if I 
am answering the question correctly, I would like to see any 
Federal legislation, any rules put in place, to be consistent 
with the Illinois language, because I think everybody agrees it 
is those communications that are sent widespread, hundreds and 
thousands to the end-users, that are clearly the abusive 
practices that people seem to be keying in on. So that language 
in the Illinois, I think, is pretty key, and I think people 
have mentioned that. Definitional language is important to 
understand that. And when questions have come up on the 
Illinois legislationit is----
    Mr. Kinzinger. Right.
    Mr. Skarvan [continuing]. Usually around the definition of 
consumer, and person, and not for resale type language that is 
inherent in that bill.
    Mr. Kinzinger. So, then, for the whole panel, with all your 
stakeholders, Illinois has its language, let us say 
Pennsylvania comes up with its language, Iowa comes up with its 
own, what is the concern with how you practice your craft, in 
terms of states that have all kinds of different languages not 
consistent with, for instance, Illinois, or no Federal 
provision? We could start on the very left, sir, if you want to 
go, if you guys have any thoughts on the varying state 
proposals.
    Mr. Sorrell. The Vermont statute is for bad faith 
assertions of patent infringement. I am not familiar with the 
specifics of the Utah, Virginia, Oregon, and Wisconsin laws, 
nor the others that are being considered. But to the extent 
that the standard is bad faith, then I am not of the view that 
companies that make good faith assertions of patent 
infringement have a problem.
    Mr. Kinzinger. OK.
    Mr. Brouillard. Yes. Clearly, I think, from our point of 
view, patent law is Federal law. And so, as I mentioned 
earlier, I think it is important that there not be a hodgepodge 
of legislation at state level that starts to countermand things 
that would be good practices for companies that do operate on a 
multi-state, or multi-national basis, such as we have heard 
today from Caterpillar, and Cisco, and others.
    Mr. Kinzinger. Yes. Mr. Skarvan, if you could talk to 
specifically how it would affect your company if you have 
varying state laws?
    Mr. Skarvan. Well, I actually asked that question 
specifically with the folks in my group, and with that wide 
variety, we literally have to have a spreadsheet to hang over 
your desk, and understand what states cover what, and what the 
penalties are. And, at the same time, you would have to have an 
understanding of exactly what states are in play, because, you 
know, many recipients in our line of business are multifaceted 
state participants. In the end, I think it would absolutely 
kill our ability to send out any communication.
    And I just wanted to reinforce, there isn't a magical 
patent demand letter that suddenly appears at some point in 
time in the conversation between business to business. It is a 
series of communications where you are trying to invite 
dialogue, and trying to address this issue, and get more 
information, find out more, and move toward a solution, all 
outside the court system.
    Mr. Kinzinger. Thanks. Thank you. And any of the other 
three gentlemen, I only have 40 seconds, if any of you three 
have anything to add, please do.
    Mr. Dixon. I had a really quick comment. I think one of the 
dangers here is putting back on the states the requirement of 
determining what is legitimate and who is lying, because within 
this there is a pretty gray spectrum of entities that are maybe 
stretching what their patent claims may actually be, and so 
that is what the Federal Court system is designed for. And I 
agree, the bad faith need to be taken care of, but there 
becomes a gray zone, and we don't want the state Attorney 
Generals having to do patent claim charts all of a sudden.
    Mr. Kinzinger. Right.
    Mr. Dixon. We want that done in Federal Court.
    Mr. Kinzinger. OK. With that, Mr. Chairman, thank you, I 
yield back.
    Mr. Terry. Thank you, Mr. Kinzinger, and we have no other 
witnesses, so I have to do a little business here before I can 
adjourn this. And so we have statements for the record, and I 
ask unanimous consent to insert into the record these papers 
and letters from Span Coalition, Credit Union National 
Association, Independent Community Bankers of America, National 
Association of Federal Credit Unions, and National Retail 
Federation. This has been vetted on both sides. So, hearing no 
objection, so ordered into the record.
    And I want to thank all of you for being here. It was a 
very narrow, intellectual discussion, and I think it was a 
really good discussion, and very helpful to us. And I really 
appreciate all of your efforts and sacrifices to be here today 
to help us now, as we will sit down and start figuring out how 
to draft a bill. You are now adjourned. Thank you.
    [Whereupon, at 11:44 a.m., the subcommittee was adjourned.]
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